How to Build an Emergency Fund (and Squash Your Financial Risk)

2/22/2018

If you create a budget and stick to it, you likely feel on top of things. Nevertheless, emergencies happen. It isn’t a question of if, it’s a question of when. Yet many people fail to build a proper emergency fund.

More than half of Americans would be unable to pay an unexpected expense of $500 or more, according to CBS News. That’s an overwhelming number of people at risk of financial crisis.

You’re aware you need to build an emergency fund, but you’re not sure how — or you have one but you’re not sure it’s enough. Here, we share everything you need to know to secure your future.

Don’t Put It Off Any Longer

Emergency funds are lauded by financial advisers, and most people know they should have one. So why do so many people risk financial crisis? Some people simply don’t make enough money, while others just put off facing the need for one.

For those in the first group, we recommend finding extra ways to make money in the short term. Work a part-time job, drive for a rideshare company, take on freelance work or sell items you don’t need. If these options aren’t viable for you, or your situation is dire, consider downsizing your home or car. Your goal is to build an emergency fund as fast as possible — you never know when the next emergency could happen.

If you have the income to build your emergency fund quickly, stop putting it off. The best way to begin is to add this item when you create a monthly budget. Try to make as much progress in building your emergency fund as fast as you can; this is your safety net for when a financial emergency arises.

How Much Should You Have in an Emergency Fund?

It’s difficult to say because it’s different for every person. That said, here are a few guidelines:

Anything is better than nothing. If an emergency fund sounds daunting, start with what you can afford. Get the ball rolling and you will create a habit of adding money each month until it’s fully funded.

When it’s fully funded, you should have three to six months of expenses saved.

To illustrate, if you have $2,500 in expenses each month (look to your budget for your specific number), then you should have between $7,500 and $15,000 in your emergency fund. That’s a wide range, so let us help you identify your ideal number. You should have a larger emergency fund if:

You’re the sole earner in the home: If you lost your job, there would be no other income stream to pay rent or buy groceries.

You’re more senior in your field: If your position is manager level or higher, you’ll have a harder time finding a new job than someone who is in a junior position. A larger emergency fund allows you to be patient and wait for the right position.

It can be hard to find a job in your field: If job openings are hard to come by in your field, you’ll want the extra cushion a large emergency fund can offer.

Your income fluctuates: If you have several slow months that coincide with a large, unexpected expense, it could be difficult to cover the costs.

You have children: For all the joy they bring, children carry additional financial risk. Plus, when you’re a parent, any financial crisis can feel 10 times more stressful. Reduce your financial stress with a strong emergency fund.

If none of these apply to you, a three-month emergency fund is probably safe. But if most or all of them apply to you, then you probably need a six-month emergency fund. Ultimately, more is always better — the peace of mind an emergency fund offers cannot be overstated.

Don’t Risk Your Emergency Fund

It can be tempting to invest your emergency fund by “storing” it in mutual funds or other assets — resist this urge! The best thing you can do is keep it in a simple savings account with no risk. The goal of an emergency fund is to provide you financial security, and you don’t get that security if you’re risking your emergency fund in anything other than savings.

Spend the Emergency Fund Right, Which Is Usually Never

If your car tires are 4 years old, odds are good you’ll need to replace them in the near future. If it’s October, the holidays are coming up in a few months. These are not emergencies. You must plan for them and have the money for them without using your emergency fund.

The emergency fund is for true emergencies. If you lose your job, or have a massive medical expense, then that’s when you tap into your emergency fund. Otherwise, don’t touch it. It’s there so you can avoid borrowing money or running up credit cards. It’s not for covering expenses you should plan for and it’s definitely not for vacations or making splurge purchases.

If you’re unsure where to start or where this ranks as a priority among your other financial goals, contact your Farm Bureau agent for smart budgeting tools and strategies for building an emergency fund.

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